Finance Standards
Questions Answered

IFRS stands for International Financial Reporting Standards. Think of it as a universal language for financial reporting. When a company in Germany and a company in Australia both follow IFRS, an investor can compare their financial health without needing to understand two different accounting systems. IFRS is published by the International Accounting Standards Board (IASB) in London and is mandatory for listed companies in over 140 jurisdictions.

GAAP stands for Generally Accepted Accounting Principles. It is the accounting framework used in the United States - a comprehensive set of rules that tells American companies how to record transactions and prepare financial statements. GAAP is established by the Financial Accounting Standards Board (FASB) and is mandatory for all U.S. publicly traded companies. Since 2009, all GAAP standards are organized in the Accounting Standards Codification (ASC).

IFRS is the international standard used in 140+ countries. GAAP is the U.S. standard. The biggest philosophical difference: IFRS is principles-based (broad principles, use judgment) while GAAP is rules-based (detailed rules with specific thresholds). Key practical differences include: GAAP allows LIFO inventory valuation (IFRS prohibits it), IFRS requires capitalizing development costs when criteria are met (GAAP mostly expenses them), and lease classification rules differ.

Revenue recognition is the accounting principle that determines when a company can record revenue (sales income) in its financial statements. The core idea: you earn revenue when you deliver what you promised, not when you receive cash. Under IFRS 15 and ASC 606, companies use a 5-step model: identify the contract, identify performance obligations, determine the transaction price, allocate the price, and recognize revenue as obligations are satisfied.

A financial statement audit is an independent examination by a qualified auditor to determine whether a company's financial statements are presented fairly, in all material respects, in accordance with the applicable accounting framework (IFRS or GAAP). The auditor gathers evidence, tests transactions, evaluates controls, and issues an opinion. An audit provides 'reasonable assurance' - not absolute certainty - that the statements are free from material misstatement.

SOX is the Sarbanes-Oxley Act of 2002 - a U.S. federal law enacted after the Enron and WorldCom scandals. It requires CEOs and CFOs of public companies to personally certify the accuracy of financial statements (Section 302) and requires companies to assess and report on the effectiveness of their internal controls over financial reporting (Section 404). SOX carries criminal penalties including fines up to $5 million and imprisonment up to 20 years for willful violations.

COSO stands for the Committee of Sponsoring Organizations of the Treadway Commission. It published the Internal Control - Integrated Framework, which is the most widely used framework for designing and evaluating internal controls. The framework has 5 components: Control Environment, Risk Assessment, Control Activities, Information & Communication, and Monitoring. It is not a certifiable standard - it is a reference framework. U.S. public companies typically use COSO to satisfy SOX Section 404 requirements.

An internal control is a process, policy, or procedure put in place to provide reasonable assurance that an organization achieves its objectives in three areas: effective operations, reliable financial reporting, and compliance with laws and regulations. Examples include: requiring two signatures on large payments (authorization), separating the person who approves payments from the person who creates vendors (segregation of duties), and reconciling bank statements monthly (reconciliation).

Segregation of duties (SoD) is a key internal control principle that requires dividing responsibilities among different people so that no single individual can initiate, authorize, record, and reconcile a transaction. For example: the person who creates a vendor in the system should not be the same person who approves payments to that vendor. Without SoD, a single employee could create a fake vendor and pay themselves. SoD is one of the most fundamental controls in any financial system.

Materiality is the concept that determines whether an error, omission, or misstatement in financial statements is significant enough to matter. Something is 'material' if it could reasonably influence the economic decisions of users of the financial statements. There is no single fixed threshold - materiality depends on the size and nature of the item relative to the financial statements as a whole. Auditors set a materiality level at the start of an audit to determine what to focus on.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company's operating performance that removes the effects of financing decisions (interest), tax jurisdictions (taxes), and accounting choices (depreciation and amortization). EBITDA is widely used to compare companies because it focuses on operational profitability. However, it is not defined by IFRS or GAAP and can be calculated differently by different companies, so always check how a company defines it.

Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash actually changes hands. This contrasts with cash accounting, which records transactions only when money moves. Example: if you deliver goods in December but the customer pays in January, accrual accounting records the revenue in December (when you earned it). Both IFRS and GAAP require accrual accounting because it provides a more accurate picture of a company's financial performance over a period.